SPARTEK CERAMICS INDIA LIMITED

CASE STUDY

STEP 1: FORMULATION OF CORPORATE STRATEGY

Spartek

works with the motto: Innovation that Pays In 1988, options available with Spartek were: Expansion of Sparteks Capacity to 40000 TPA, Diversification and Merger or Acquisition

STEP 2: SELF ANALYSIS OF ACQUIRER FIRM

Spartek has produced marketable quality product from the very first day of production. Ninety percent first grade output was achieved within days 100% capacity utilization within 2 weeks of the commencement of commercial production.

STEP 2: SELF ANALYSIS OF ACQUIRER FIRM

Strengths: Use of Single Fast Firing Technique which cuts down the process time from about 60 hours to about an hour leading to 70% fuel saving As much as 80% first quality tiles output Use of LPG, the cleanest fuel, giving the best colour development Marketable quality products from very first day First Mover benefit as this industry was created by Spartek Strong brand image and credibility Strong hold in Andhra Pradesh area

STEP 2: SELF ANALYSIS OF ACQUIRER FIRM

Weaknesses: Retail Visibility is low Opportunities: Due to strong brand image, it can diversify into new segments It can expand and capture the market share It can acquire another company in order to grow further Threats: Ceramics Industry is saturated Diversification can lead to disastrous outcomes Competitors of Spartek have undertaken an expansion route

STEP 2: SELF ANALYSIS OF ACQUIRER FIRM

Sources of Differentiation: Single firing of less than one hour. This improves the inherent quality of tiles and results in 70% fuel saving. LPG Fuel used for the first time in India. LPG is the cleanest fuel and given the best colour development of all. Pressing by high capacity hydraulic presses (680 tonnes. This result in fast cycles and very high first quality products (about 95%) Glazing is possible by all the different methods of glazing known till date to achieve very special effects, surface and shades. Decorations are permanent as they are beneath the glaze decoration and are fired at a high temperature of around 12000 C.

STEP 2: SELF ANALYSIS OF ACQUIRER FIRM

Competitive Environment: The lack of entry barriers No prior licence from the government was required to start a tile unit Major expansion programmes were carried out by the players in the industry The new players consisted of both established brand names and new entrants. Most of the new entrants signed up with well-known ceramic tile producers for technical collaboration and chose proven equipments suppliers

STEP 2: SELF ANALYSIS OF ACQUIRER FIRM

Spartek can adopt the role of a cautious acquirer a company which purchases many small firms and avoids placing too much of its funds into any one acquisition as it is a cost effective strategy wherein its balance sheet will take hits many times, but of only small amounts.

STEP 4: DEVELOP ACQUISITION CRITERIA

Size of Investment: In order to carry out its role as a cautious acquirer, Spartek should invest in a small firm in order to minimize the cash outflow Type of Technology: Spartek should ideally acquire a firm which also uses the same technology as Spartek so that there is smooth merger of the operational activities Industry Focus: Spartek should acquire a company within the industry and which is closely related to its existing line of business Geographic Location: Spartek should acquire an industry which is present in different geographic locations so that the retail reach of its product will increase. Strategic Fit: Spartek should acquire a company which will complement Spartek and which will add value to Spartek Ceramics India Limited and help it to attain further growth.

STEP 5: IDENTIFY INDUSTRY SECTORS

Spartek should mainly concentrate on its own industry sector for expansion However, along with the Ceramic Industry, Spartek can consider sanity ware, Stoneware pipes etc. as these are in the related line of business.

STEP 6: SCREENING AND SELECTION OF ACQUISITION TARGETS

Somany Pilkingtons Limited

Plants in both Gujarat and Haryana with capacity of 12000 MT and 21600 MT respectively Expansion plan and new units for increasing capacity by 30400 MT in Gujarat and Haryana Has a significant presence in sanitary ware sector Is a veteran in the tile industry Has shares trading at Rs 100 in May 1988 Has acquired Orient Ceramics Limited (OCL) which has a capacity of 5000 TPA Long term borrowing = 10.34 million Earnings After Tax = 20.57 million D/E = 0.1 Enterprise Value = 45.91 Enterprise value/sales = 0.2

STEP 6: SCREENING AND SELECTION OF ACQUISITION TARGETS

Neyveli Ceramics and Refractories Limited (Neycer)

Plant in Pondicherry with a capacity of 10000 MT In the business of manufacturing sanitary ware, ceramic ware, stoneware pipes etc. Strong brand image and excellent retail visibility Shares trading at face value of Rs 10 in May 1988 Long term borrowings = 129.66 million Earnings After Tax = (18.94) million D/E = 4.15 Enterprise Value = 144.28 Enterprise value/sales = 1.06

STEP 6: SCREENING AND SELECTION OF ACQUISITION TARGETS

Somany is a strong competitor and an able contender to capture the market share of Spartek Acquisition of OCL by Somany shows that the company is ambitious and has aspirations to grow further with the presence of a fairly strong management. Their D/E ratio is very low and the Enterprise value to sales ratio is low.

STEP 6: SCREENING AND SELECTION OF ACQUISITION TARGETS

Whereas Neycer is in major troubles due to the loss it has incurred as well as the heavy burden of borrowings to finance the cost over runs. However, Neycer has a strong brand image and excellent retail visibility in South Indian market. Also the capacity of their Pondicherry plant is exactly what Spartek needs to reach the government sectioned limit of 40000 MT. Their D/E ratio is high and Enterprise value to sales ratio is high as well.

STEP 6: SCREENING AND SELECTION OF ACQUISITION TARGETS

Hence, Spartek should acquire Neycer. The synergy that Spartek would achieve because of this would be significant, influencing it to a big industry player in terms of capacity and also making it a player in the sanitary ware sector. From the target companys point of view, Spartek has the necessary expertise in the ceramic tile industry where as Neycer is experiencing large cost and turnover-runs.

THANK YOU
Group Members:
Aruttam Biswas Harsh Chopra Supriya Gunthey Bharati Malik